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Natural Gas Analysis for the Week of March 12, 2012

Last week May Natural Gas took out its last swing bottom at 2.527. The move not only resumes the downtrend, but it also indicates further downside pressure is likely. Additionally, a new main top was formed at 3.015. A trade through this price will change the weekly main trend to up.

In addition to the bearish swing chart, natural gas is also trading inside of a bearish channel down chart pattern. This channel will control the short-term direction of the market as long as the downtrending Gann angle at 2.604 this week remains intact. On the support side of the channel, the down-sloping Gann angle at 1.875 is the next potential target.

Fundamentally, the supply and demand situation continues to be bleak for natural gas. Bloated inventories and mild late-winter weather should continue to weigh on prices until the industry begins to curtail production. At the start this week, prices will be hovering slightly above the ten-year low.

Last week the U.S. Energy Information Administration showed total domestic inventories fell by 80 billion cubic feet to 2.433 trillion cubic feet. This was below pre-report estimates for an 84 bcf drop and the five-year average draw for that week of 92 bcf. Adding more pressure to prices is the news that stocks remain at record highs for this time of year. Shockingly, gas in storage is at more than 700 bcf, or 40 percent above both 2011 levels and the five-year average level.

With winter grinding to an end, stocks are likely to end the heating season at an all-time high of 2.2 trillion cubic feet, well above the 29 year record set in 1983 at 2.148 tcf. The time period between the heating season and the cooling season traditionally shows an inventory build. This may cause trouble between now and August if storage facilities reach capacity and more supply is thrust upon the market.

Although the outlook remains grim, outages and production cuts could slow down the rate of the price decline. Nuclear plan outages may lead to more demand. It’s a small amount, but the draw may be sustainable. Additionally, planned production cuts by industry giants such as Chesapeake Energy could also trim some of the supply that normally reaches the market. Finally, a few industries are switching from coal to natural gas to run their plants. This is about as positive as I can get, but don’t expect much upside movement in prices.

Traders should continue to look for prices to drop, but beware of quick daily upside reversals because of short-term oversold conditions. The 2.00 barrier may prove to be temporary near-term support, but don’t expect any sustainable up moves. Until more energy companies begin to cut production, the supply and demand situation is not likely to improve for some time.

Factors Affecting Natural Gas This Week:

Weather: The mild winter appears to be ending before spring begins on the calendar in two weeks. This could mean that demand fell again last week.

Supply and Demand: Production remains steady and supply is not at a level it should be at this time as we enter the seasonal stock-piling period. Keep in mind that traders are going to react to how much the pre-report estimates miss the actual number. Everyone seems to believe that production will increase during the upcoming week, but traders will be more receptive to how bad analyst guesses are.

Chart Pattern: The channel down chart pattern and the prolonged weekly downtrend on the swing chart are two reasons to believe the trend will continue to drive the market lower.

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